Additional Factors

Though important, your gross monthly income and debts are not the only factors a lender will consider. Others include:

• Business Plan: This informs the lender of the type of business you have, and its potential financial feasibility. (A brief plan will normally suffice. ) Lenders want to understand how your company makes money, who your clients are, where you are headed, what your goals are, and how do you plan to get there.
  
  Examples of business plans:
  • Example I – Contains several types of business plans
  • Example II – Information from the U.S. Small Business Administration
  • Example III – Information from BulletProof Business Plans
    
    
• Year-to-Date Profit and Loss Statement: This tells the lender how you manage your cash flow, and whether you have any debt management or financial problems. Lenders usually request at least three consecutive years of statements.
• Income: Businesses can include money earned from sales of products or services, as well as income derived from dividends and other sources. Spread lump sum payments received over a 12-month period to accurately assess of your monthly income.
• Down Payment: This must meet the minimum standards required by the particular type of loan you chose. Typically, the more money put towards the purchase, the lower the amount you need to borrow. This can increase your chances of securing a loan. For commercial loans, a down payment of at least 20% or more is required. However, financing through a nonprofit lender often provides greater flexibility in the down payment requirements.
  
  The source of the down payment will be considered as well. The following are acceptable sources:
  • Funds from business savings and/or checking accounts;
  • Equity in any property currently owned by the business;
  • Proceeds from the sale of assets, such as other property. The business can sell any item with a value that can be supported by an independent appraisal. You must provide proof of sale and sale price. A bill of sale is often sufficient evidence;
  • Income from other investments; and
  • Money from funders.
• Credit History: As with personal loans, the lender will pull a credit report on your business to determine your organization’s credit risk and ability to repay the mortgage. Because many businesses do not have a solid credit history, the lender might request verification from your creditors.
  
  Lenders sometimes require owners and board members of start-up businesses to personally guarantee the loan, which makes them personally responsible for the loan in the event that the business is unable to meet its obligations to pay the mortgage. In this situation, credit risk and financial capabilities serve as the basis for the business’ ability to secure the loan, as well as that of other loan guarantors.
  
  Lenders consider the following when determining ability to repay a mortgage:
  • How much does the business (you/funders) owe other creditors?
  • How often does the business (you/funders) borrow?
  • Does the business (you/funders) pay bills on time?
  • Does the business (you/funders) operate within its means?
  • Does the business (you/funders) have bad credit and/or unpaid debts?

If problems appear on the organization’s credit report, the lender may ask for a letter of explanation and supporting documentation to prove settlement of past debt problems. For additional information on credit, review Chapter 3: Understanding Credit.

• Financial Stability: One of the biggest factors that lenders consider when lending to small businesses. This includes the ability to pay current debts, infuse money into the business, and grow and/or operate with positive financial results.
• If you are borrowing as a business, lenders will review:
  • Your history with clients;
  • The variety of clients;
  • Whether your client list focuses on one or several companies;
  • How well you have been selling your products and/or services, and growth trends;
  • Profit margins/losses over the last three years;
  • Money and assets the company has to cover unexpected expenses, slow sales, and other issues;
  • The consistency of your cash flow. Have there been problems in the past? If so, how did you handle them?;
  • Industry track record/reputation;
  • If major industry players are on your staff that can generate new/additional business.
• Collateral: The lender will evaluate the property you intend to purchase (with the help of an appraisal) to determine if the property is valuable enough to support the loan request. This is called the Loan-to-Value Ratio. Most banks will only lend up to 75% of the cost of what the property would be worth post-construction completion. The loan is based on the estimated value of the property after any rehabilitation or remodeling on the building has occurred.
  
  For example, you purchase a property for $100,000 and put another $250,000 into rehabbing the space. In this situation, the loan value will be 75% of a $350,000 loan ($100,000 + $250,000). However, if you purchase your space with a small business development loan, such as those offered by the U.S. Small Business Development Center or other community-based financial institution, you might be able to increase the loan amount to as much as 90%.
  
  The property then becomes your collateral, and serves as a guarantee to the lender that if you stop making mortgage payments, they will recoup their investment through the sale of the property.
  
  Other items that can be considered collateral include:

• Other properties owned by the business; and
• The owner or founder of the business, or other individual, may put up a letter of credit stipulating they will personally pay all or a portion of the mortgage in case of default.
• Occupancy Costs: Lenders will want to know how much it cost to lease your last/current space. Were you responsible for property taxes, maintenance and building insurance, or were you simply paying the rent? You have a better chance of securing a loan if you have been paying these additional expenses; to many lenders, it's a sign that you have both the financial stability and capability to maintain the costs of operating a building.
• Other Factors: Lenders may also have additional questions for you about your project that deal with the feasibility of financing the property. For a more in-depth exploration of these issues, review the Lender’s Criteria in Nonprofit Application section.